President Joe Biden is presiding over an economy that is simultaneously inflicting hyper-inflation and negative growth on the American people. This is stagflation, a one-two punch that the U.S. economy has not experienced since the Jimmy Carter days more than 40 years ago. But no worries, says President Biden, who assured Americans trying to make ends meet that the U.S. economy is “on the right path.”
The Biden administration rejects the label “recession” even though the last two consecutive quarters have experienced contractions in the Gross Domestic Product (GDP) – the standard definition of a recession.
Even if we are not yet in a recession as the Biden administration argues, technical signals such as the inverted yield curve and a decline in home building and buying are pointing strongly to a coming recession.
When all is said and done, however, what really counts is “whether current economic conditions are creating hardship,” as Raphael Bostic, the president of the Federal Reserve Bank of Atlanta put it. “There are a lot of people hurting,” he said.
Rather than address the stagflation head-on with workable solutions that won’t make things worse, the Democrats are intent on pushing through Congress another of their legislative gimmicks. They call their handiwork – the product of a “compromise” deal worked out by Senate Majority Leader Chuck Schumer and West Virginia’s Democrat Senator Joe Manchin – the “Inflation Reduction Act of 2022.” False advertising would be an understatement! It is a skinny-down version of President Biden’s failed Build Back Better proposal. The Schumer-Manchin bill is laden with green energy pork spending. It will do nothing significant for the rate of inflation in either direction while raising taxes for middle class Americans.
The mislabeled bill will result in a very small increase in inflation during the next two years, according to the Penn Wharton Budget Model (PWBM). Using the Personal Consumption Expenditures (PCE) price index preferred by the Federal Reserve to gauge the rate of inflation, the model estimates an increase of up to a 0.05 percentage point in 2024. The model then predicts a negligible fall in the inflation index of 0.25 percentage point by the late 2020s. “These point estimates are statistically indistinguishable from zero, thereby indicating low confidence that the legislation will have any impact on inflation,” PWBM staff members concluded.
The bill contains nearly $370 billion in new government spending and tax credits to accelerate the transition from reliance on fossil fuels to total reliance on green energy, in addition to billions of dollars more to extend Obamacare subsidies. Its proponents say that the additional spending will be more than offset by savings achieved by allowing Medicare to negotiate with Big Pharma for lower prescription drug prices and by huge tax increases on corporations and wealthy individuals.
Look beneath the surface, however, and you will find proof of what former President Ronald Reagan said decades ago. “Government’s view of the economy could be summed up in a few short phrases,” Mr. Reagan said. “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
At a time when the economy is either already in recession or on the verge of entering a recession, President Biden and his Democrat colleagues in Congress want to increase taxes. Senators Schumer and Manchin are touting their bill’s tax provisions as only going after corporations and wealthy individuals who have taken advantage of tax loopholes to avoid paying their “fair share.” But according to the nonpartisan Congressional Joint Committee on Taxation, the Schumer-Manchin proposal will raise federal taxes on Americans making less than $400,000, violating President Biden’s pledge to not raise taxes on anyone earning less than $400,000.
More specifically, the Joint Committee on Taxation estimated that federal taxes will increase by over $16 billion for taxpayers earning less than $200,000 and will increase by $14.1 billion for taxpayers earning between $200,000 and $500,000.
In short, the Schumer-Manchin legislation would raise taxes on middle class Americans, just as the economy is either already in a recession or fast approaching one. Higher taxes will take more money out of consumers’ pockets, which they might otherwise have had available to spend on goods and services even as prices continue to rise because of the Bidenflation.
The mislabeled “Inflation Reduction Act of 2022” contains a new 15 percent minimum tax on corporations that report to their shareholders at least $1 billion in profits. This counterproductive, job-killing tax increase will cancel out the tax incentives already in place that have encouraged corporations to make capital investments, expand their businesses, and spend more money on research and development to create productive technological innovations. Many businesses will end up passing along at least a portion of their increased costs in new taxes to their customers, leading to even higher prices that consumers will be required to pay for basic goods and services.
The climate portion of the proposed legislation would subsidize the purchase of expensive electric vehicles through generous tax credits of up to $7,500 for the purchase of new electric vehicles and tax credits of $4,000 for used electric vehicles. The credits for new electric vehicles are supposed to be targeted to help individuals who make $150,000 a year or less (or $300,000 for people filing jointly).
The average price of new electric cars has risen to $66,000 according to Kelley Blue Book – approximately $18,000 more than the average cost of a non-electric car. A $7,500 tax credit will hardly do much to make electric cars affordable to most ordinary Americans today. In any case, the tax credit would only apply to new electric cars that cost no more than $55,000, which is $11,000 less than today’s average price of new electric cars.
The average price of used electric cars is obviously lower. However, recent data show that used electric car prices are increasing year over year at a rate that is about double the year over year increase in the prices for used cars overall. A $4,000 tax credit will not do much to incentivize people to shell out considerably more money for a used electric car than they would have to spend to buy a used non-electric car in good condition.
If these tax credits do stimulate more consumer demand for electric cars, the tax credits will primarily incentivize car manufacturers to maintain artificially high prices for electric vehicles that are built using today’s technology with only minor enhancements. They will have less incentive to finance risky, long-term R&D projects that might possibly create technological breakthroughs which one day down the road may or may not significantly lower the average cost of electric vehicles. The $10 billion in investment tax credits for building domestic manufacturing facilities that make electric vehicles and renewable energy technologies may only marginally influence manufacturers’ risk-benefit calculations.
The Schumer-Manchin bill contains $60 billion for clean energy manufacturing in the U.S. and $30 billion in tax credits for companies to produce wind turbines and solar panels. This is a much larger version of former President Obama’s fiscal stimulus plan of 2009-2010 that lavished taxpayers’ money through loan guarantees on failed green energy enterprises. The disastrous experience with the solar panel manufacturer, Solyndra Inc., should have taught policy makers what happens when the government tries to pick winners and losers and engages in centralized industrial planning. Evidently, not so for congressional Democrats and the Biden administration.
Moreover, why do the solar and wind power industries need any more government subsidies when the costs of these sources of power are said to have fallen 89 percent and 70 percent respectively over the last decade? This is just throwing away taxpayers’ money to subsidize alternative energy companies that by now should be able to compete in the energy marketplace on their own.
The Schumer-Manchin bill would also redistribute wealth by funneling over $60 billion to support low-income communities and communities of color that have purportedly been adversely affected disproportionately by the environmental and health effects of climate change. This is on top of $27 billion that would be used to establish a “green bank” to support clean energy projects with the focus primarily on disadvantaged communities.
To be fair, there are a couple of potentially constructive provisions in the climate portion of the Schumer-Manchin bill. Tax credits over 10 years for companies building new sources of electricity that do not rely on fossil fuels could be helpful. However, this program must be reviewed at frequent intervals to make sure that the tax credits are having their intended effect and not being abused. If these reviews show that the tax credits are not working, the credits should be scrapped. There is also a tax credit for companies that are willing to incur the prohibitive cost of capturing and burying carbon dioxide from gas emitting facilities before the gas can reach the atmosphere. This tax credit could be marginally helpful in the short run. However, it would make much more sense to use tax incentives to stimulate research and development leading to innovations that would significantly bring down the cost of carbon capture and sequestration for much wider use.
The so-called “Inflation Reduction Act of 2022” does virtually nothing to help ease inflation. For the next couple of years it will actually increase inflation slightly. At the same time, its huge spending on green energy and its tax provisions taken as a whole are likely to worsen the recession that is either here already or right around the corner. The name of the bill should be changed to the “American Prosperity Reduction Act of 2022.”